Australia Cuts Interest Rate to Record 2.25%, Aussie Falls to New Low

Australia’s central bank cut its benchmark interest rate to a new record low and said the local currency remains overvalued, joining a dozen global counterparts in easing policy this year as commodity prices tumble.

Traders are pricing in a greater than 50 percent chance the RBA will cut rates by another quarter point at the March meeting, interbank cash-rate futures show.

“We obviously live in a low-interest world,” Australian Treasurer Joe Hockey told reporters in Canberra after the decision. “The majority of our trading partners, apart from China, have virtually zero interest rates. So the Reserve Bank does have more room to move.”

Australia is a developed-world rarity in that almost 24 years of growth leave it with rate ammunition, while policy makers from Tokyo to Frankfurt undertake quantitative easing to reflate their economies. Today’s cut also aims to put a ceiling above a currency that has dropped almost 12 percent in the past three months, the worst performing major currency.

The overnight cash rate target was lowered by 25 basis points to 2.25 percent, Governor Glenn Stevens said in a statement. Growth will be weaker for longer and the jobless rate peak higher than earlier expected, he said.

Stocks surged to an almost seven-year high, the currency traded at a more than 5 1/2-year low and bond yields dropped to a record following the decision. Stevens’s move to cut follows a collapse in the price of iron ore, which generates A$1 in every A$5 of export income, and a rush to ease among global policy makers that threatened to drive Australia’s currency higher.

The RBA last reduced rates 18 months ago, the time it generally takes for stimulus to make its way through the economy, suggesting there was little remaining in the pipeline.

Iron ore reached the lowest since at least 2009 last week amid signs the bear market that began last year has further to run with China’s steel mills curtailing output before a national holiday and major producers including Melbourne-based BHP Billiton Ltd. adding supply.

Yet further rate stimulus risks inflating a house price bubble. The Corelogic-RP Data home value index, released Monday, showed Sydney home prices rose 13 percent in January from a year earlier. Home loans to investors also climbed to a record 50.4 percent of all mortgages in October.

“The bank is working with other regulators to assess and contain economic risks that may arise from the housing market,” Stevens said today.

The drop in energy prices threatens Australia.

The first of seven liquefied natural-gas developments began shipments last month, putting the nation on course to surpass Qatar later this decade as the world’s biggest exporter of the fuel. Origin Energy Ltd., the Australian company building a natural gas export plant with ConocoPhillips, is looking at deferring proposed oil and gas projects following a decline in crude prices, it said in December.